Textile And Apparel Rules

Textile and Apparel Preference Rules U.S. Customs & Border Protection

U.S.-Morocco FTA Technical Seminar: Textile & Apparel Rules 14-18 March 2005 Casablanca, Morocco

U.S. Customs & Border Protection

U.S. Duty Rates & the FTA

Brief Textile Lesson

Fiber, Yarn & Fabric

Concepts Defined

FTA Preference Rules

Tariff Shift Rule

Compliance & Enforcement

Resources

Overview

On March 1, 2003, the U.S. Customs Service became part of the Bureau of Customs and Border Protection (CBP) within the Department of Homeland Security.

CBP has many roles, the priority mission is to protect our borders.

Regulating & Facilitating International Trade

Collecting Import Duties

Enforcing U.S. Trade Laws

The U.S. has over 300 Ports of Entry

U.S. Customs & Border Protection (CBP)

Effective for exports on/after 1 January 2005, all textiles and wearing apparel from World Trade Organization (WTO) members are no longer subject to quota.

Possible Chinese Safeguards

Imports After Quota Expire

Without quotas, competition will be fierce and the social/political aspect is something to watch!

“ More than 80% of our export earnings are coming from this [apparel and textile] sector .” - Farkul Ahsan, Bangladesh Embassy official .

Where Free Trade Hurts: The end of textile quotas makes economic sense, but the social disruption will be huge. (Business Week, Dec. 15, 2003)

Countdown to 2005: Developing Nations Fear Millions of Job Losses (WWD, Feb. 3, 2004)

Imports WITHOUT Quotas

Without quotas, textile and apparel manufacturers will be searching for a Competitive Advantage.

Without quotas, price will play a major factor in determining who has a Competitive Advantage.

Competition

What is the Purpose of an FTA? Remember this is a Free Trade AGREEMENT.

In all agreements there are negotiations - and all parties make concessions.

The intent of an FTA is that both parties benefit from that agreement.

Purpose of an FTA?

Products of Morocco can be eligible for three different duty rates depending on the inputs (raw materials) and production.

( 1 ) Non-FTA products are subject to Regular Duties

FTA products are ( 2 ) Duty Free or ( 3 ) Reduced Duties

Three Possible Duty Rates www.ustr.gov

For the majority of qualifying textile products, tariffs will be eliminated over six (6) years. (see Annex IV – Tariff Elimination)

However, immediate, duty-free treatment will be provided to selected items – up to designated quantities.

Annex 4-B: Tariff Rate Quotas for originating goods. Quantities above the levels in Annex 4-B will immediately be eligible for the reduced rates listed in Annex IV – Tariff Elimination.

FTA Duty Reductions

Upon full implementation of the U.S.-Morocco Free Trade Agreement, ALL originating textiles and wearing apparel will be duty free.

FTA Duty Reductions

Although the average trade-weighted duty rate for all U.S. imports is less than 2%, U.S. duty rates on textiles and apparel remain high.

Product Average Duty FTA Rate *

Yarn 8% 0%

Fabric 10% 0%

Made-Up Articles 10% 0%

Apparel 16% 0%

* When fully implemented

Average U.S. Duty Rates

An “ Originating ” good meets the applicable FTA preference rule of origin.

A “ Non-Originating ” good does NOT meet the applicable preference rule of origin.

“ Originating” Goods

Example of High U.S. Duty Non-FTA vs. FTA

Nylon/Spandex Knit Top HTS 6109.90.10

Non-FTA Rate = 32%

FTA Duty Rate = 0% (free)

Example of High U.S. Duty

Cotton Knit Shirt HTS 6105.10.00

Non-FTA Rate = 19.7%

Cotton Trousers = 16.6%

Men’s 6203.42.4015

Women's 6204.62.4020

MMF Trousers = 27.9%

Men’s 6203.43.4010

Women’s 6204.63.3510

Chapter 4 - Textiles and Apparel

Articles :

4.1 - Tariff Elimination

4.3 - Rules of Origin and Related Matters

4.4 - Customs and Administrative Cooperation

Annex 4-A - Preferential Rules of Origin (a.k.a. Tariff Shift Rules)

Annex 4-B - Tariff Rate Quotas on Apparel Goods

U.S.- Morocco FTA

In most cases, a good must be “ more than ” a product of Morocco, it must also meet the FTA preference rule of origin.

FTA Preference Rules

Is this “Originating” fabric?

Preferential Rule of Origin

Annex 4-A(1)(i):

“ each of the non-originating materials used in the production of the good undergoes an applicable change in tariff classification specified in this Annex as a result of production occurring entirely in the territory of one or both of the Parties …”

FTA Originating Product

Harmonized Tariff Schedule U.S. Harmonized Tariff Schedule: www.usitc.gov Know the HTS Number!

The Harmonized Tariff Schedule (HTS) shows the applicable duty rate.

It also shows if the item qualifies for various trade preference programs

Just like classification, always look at the rule for the finished product .

Harmonized Tariff Schedule www.usitc.gov

Harmonized Tariff Schedule

U.S. Duty Rates

Other Preference Programs

Quotas

Non-WTO Members

Chinese Safeguards

U.S. Import Data

U.S. Demand for Imported Products

Market Analysis

What is a textile product?

Brief Textile Lesson

Fiber…..Yarn…..Fabric…..

Textile Manufacturing

Fiber

staple fibers

filament fibers

Fiber

Yarn

single

plied

Yarn

Fabric

woven

knit

non-woven

Fabric

Fiber Forward

Yarn Forward

Fabric Forward

Concepts Defined The textile and apparel preference rules are very similar for U.S. Free Trade Agreements with Morocco, Bahrain, the NAFTA, Singapore, Chile, and Australia.

Fiber Forward requires U.S. and/or Morocco origin fiber, and all operations forward.

Fiber Forward Fiber Forward

Yarn Forward requires U.S. and/or Morocco origin yarn, and all operations forward, but the fiber may originate outside the U.S. and Morocco.

Yarn Forward Yarn Forward

Fabric Forward requires U.S. and/or Morocco origin fabric, and all operations forward, but the fibers and yarns may originate outside the U.S. and Morocco.

Fabric Forward Fabric Forward

U.S.-Morocco FTA Preference Rules

Yarn

Fabric

Made-up Articles

Apparel

FTA Preference Rules The “General” Rule

Reminder: Always look up the Harmonized Tariff Schedule (HTS) number for the finished product that will be exported to the United States.

It is important to know the HTS number for the products you produce!

FTA Rules

The preference rule for yarn is fiber forward , except:

spun yarns of silk, wool, and vegetable fibers (other than cotton) may be spun with fibers originating outside US/Morocco.

filament yarns must be formed (extruded) in Morocco or the United States.

FTA Rule for Yarn

The preference rule for fabric is yarn forward , except:

fiber forward:

cotton & man-made fiber knit fabric

man-made fiber non-woven fabric

certain specialty fabrics

fabric forward:

silk & linen fabrics

coated fabrics, but with exceptions

FTA Rule for Fabric

The preference rule for made-up articles is yarn forward , except:

fabric forward:

silk & linen articles

man-made fiber luggage

certain other products

Rule for Made-Up Articles Examples of Made-Up Articles: Towels, Bedding, Carpets, Luggage, etc.

The preference rule for apparel is yarn forward , exceptions include:

cut & sew rule for:

Certain apparel made from specific fabrics

Apparel made of silk fabric

Apparel made of linen fabric

Apparel made of fabrics in “short supply”

FTA Rule for Apparel

Tariff Shift Rule

International Nomenclature (HTS)

WTO Consistent

Transparent

Not Subjective (“Substantial Transformation”)

Unlike “Value Added” Rules

Tariff Shift Rule

50 - Silk

51 - Wool

52 - Cotton

53 - Other Vegetable

54 - Man-Made Filaments

55 - Man-Made Staple

56 - Wadding, etc

57 - Carpets, etc

58 - Special Fabrics

59 - Coated Fabrics

60 - Knit Fabrics

61 - Knit Apparel

62 - Woven Apparel

63 - Made-Up Articles

Harmonized Tariff Schedule Section XI - Textile and Textile Articles U.S. Harmonized Tariff Schedule: www.usitc.gov

A change to heading ####, from any other heading, except ####, #### through ####, and ####.

Example for Cotton Yarn (Heading 5205) : A change to headings 5201 through 5207 from any other chapter, except from headings 5401 through 5405, or 5501 through 5507.

Tariff Shift Rule

Remember that the preference rule for yarn is “Fiber Forward”

Therefore the fibers must originate in a preference country.

Preference Rule for Yarn

A change to headings 5201 through 5207 [ cotton yarn ] from any other chapter * , except from headings 5401 through 5405 [ man-made filament fibers ] , or 5501 through 5507 [ man-made staple fibers ] .

* since cotton fibers are classified in chapter 52, foreign fibers may not be used.

Example: Cotton Yarn ( 5205)

Rule as written...

A change to headings 5201 through 5207 from any other chapter, except from headings 5401 through 5405, or 5501 through 5507.

Or, you can say...

A change to cotton yarn from any other chapter, except from man-made fibers.

You must use Morocco and/or U.S. Cotton and Man-Made Fibers.

However, all other fibers may be foreign…

There are always exceptions….

For example, if you have a blended fiber yarn, 65% Cotton and 35% Wool, the wool fibers do NOT have to be a product of Morocco or the United States.

Blended Fibers

Textile Product “ General” Rule

Yarn Fiber Forward

Fabric Yarn Forward

Made-up Articles Yarn Forward

Apparel Yarn Forward

Preference Rule Summary There are exceptions to every rule!

U.S. - Morocco FTA

Preferential treatment for certain textiles and apparel

Advanced Lesson

U.S. - Morocco FTA

Preferential Rules of Origin

Annex 4-A of the FTA (Textiles & Apparel)

Annex 4-B: Tariff Rate Quotas

Keep in mind that most textile and apparel products must be “more than” a product of Morocco to qualify for the FTA preferential treatment.

“ Fiber Forward”

Fibers must originate in one or both of the Parties

Yarn must be formed in a Party

General Rule for Yarn

Raw Cotton (5201) is grown in Egypt and exported to Morocco

Formed into Cotton Yarn (5205) in Morocco

Cotton Yarn ( 5205 ) exported to U.S.

Origin? Eligible for FTA Preference?

Example 1 - Cotton Yarn

Fiber Yarn Fabric Cut & Sew

Egypt Morocco

Example 1 - Cotton Yarn Fiber Forward Rule

A change to headings 5201 through 5207 [ cotton yarn ] from any other chapter * , except from headings 5401 through 5405 [ man-made filament fibers ] , or 5501 through 5507 [ man-made staple fibers ] .

* Since cotton fibers are classified in chapter 52, foreign fibers may not be used.

Example 1 - Cotton Yarn

“ Yarn Forward”

Yarn and Fabric formation must occur in one or both of the Parties

General Rule for Woven Fabric

Raw Cotton (5201) produced in China and exported to Morocco

Polyester Staple Fiber (5503) produced in Japan and exported to Morocco

Cotton and Polyester further processed, then blended and spun into a 70% Polyester/30% Cotton Yarn (5509) in Morocco.

Polyester/Cotton Yarn woven into Oxford Cloth fabric (5512) in Morocco

The Oxford Cloth ( 5512 ) is exported to the U.S.

Example 2 - Woven MMF Fabric

China Morocco Morocco

Japan

Example 2 -Woven MMF Fabric Yarn Forward Rule

A change to heading 5512 through 5516 from any heading outside that group, except from heading 5106 through 5110, 5205 through 5206, 5401 through 5404 or 5505 through 5510.

(remember, the general preference rule for fabric is “Yarn Forward”)

Example 2 -Woven MMF Fabric

A change to heading 5512 through 5516 from any heading outside that group, except from heading 5106 through 5110 [wool yarn] , 5205 through 5206 [cotton yarn] , 5401 through 5404 [man-made filament yarn] or 5505 through 5510 [man-made staple yarn] .

Therefore all wool, cotton and man-made fiber yarns must be formed in Morocco and/or the U.S., but fibers may come from anyplace.

Example 2 -Woven MMF Fabric

“ Fiber Forward”

Fiber, Yarn and Fabric formation must occur in one or both of the Parties

General Rule for Knit Fabric

“ Yarn Forward”

Yarn, Fabric, and Apparel formation must occur in one or both of the Parties

Made in Morocco General Rule for Apparel

Not all items follow the yarn-forward rule.

Some apparel rules have an easier “cut-and-sew” rule, including:

6108.21 Certain Cotton Underwear

6108.31 Certain Cotton Pajamas

Woven apparel made of “short supply” yarns and/or fabrics (Chapter 62 Rule 2)

Built into the Tariff Shift Rules (Annex 4-A)

Exceptions to the Rule...

Annex 4-B: Tariff Rate Quotas

Although duty rates will be eliminated within 5 years of the implementation, for certain originating goods listed in Annex 4-B, the duty rate will be zero (0%) for a specified quantity of goods.

Excess quantities are eligible for reduced duties (Article 4.1.7)

Beginning in year six (6), all goods described in Annex 4-B will be duty-free.

Tariff Rate Quotas

For purposes of determining the origin of a good of Chapters 61 - 63, the rule applicable to that good shall only apply to the component that determines the tariff classification of the good and such component must satisfy the tariff change requirements….

Chapter 61, Chapter Rule 2

Component that Determines the Tariff Classification

The tariff shift rule only applies to the component that determines the tariff classification

There are a few exceptions, but in most cases, you are not concerned about the origin of all other fabrics.

General Rule for Apparel

What is the component that determines the tariff classification?

Raw Cotton (5201) and Polyester filament fibers (5503) are produced in the U.S.

Cotton and Polyester fibers are combined and spun into a 80% Cotton/20% Polyester yarn (5206) in the U.S.

Cotton/Polyester Yarn is woven into Twill Fabric (5210) in the U.S. and exported to Morocco

Twill Fabric cut and sewn into women’s cotton pants ( 6204.62 ) in Morocco and exported to the U.S.

Example 3 - Pants (Trousers)

U.S. U.S. U.S. Morocco

Example 3 - Pants(Trousers) Yarn Forward Rule

A change to subheadings 6204.61 through 6204.69 from any other chapter, except from headings 5106 through 5113, 5204 through 5212, 5307 through 5308 or 5310 through 5311, Chapter 54, or headings 5508 through 5516, 5801 through 5802 or 6001 through 6006, provided that the good is both cut and sewn or otherwise assembled in the territory of on or both of the Parties.

Example 3 - Pants(Trousers)

A change to subheadings 6204.61 through 6204.69 from any other chapter, except from headings 5106 through 5113 [wool yarn/fabric] , 5204 through 5212 [cotton yarn/fabric] , 5307 through 5308 or 5310 through 5311 [certain yarns/fabrics (jute)] , Chapter 54 [man-made fiber filament yarn/fabric] , or headings 5508 through 5516 [man-made fiber staple yarn/fabric] , 5801 through 5802 [certain specialty fabrics] or 6001 through 6006 [knit fabric] , provided ....

Therefore, all wool, cotton and man-made fiber yarns and fabric must be produced in the U.S. and/or Morocco.

However, this means the trousers could be produced with foreign Silk fabric (5007), or from Linen (5309), and the garment will still receive FTA treatment.

Exception to the Rule : For certain apparel, certain visible lining fabrics must be formed from yarn and finished in the territory of a Party.

Men’s and women’s suits & suit-type jackets, skirts, overcoats, anoraks, windbreakers, & similar articles

Special Rules: Visible Lining

100% Cashmere Yarn (5109) formed in the U.S. and exported to Morocco

Cashmere Yarn woven into fabric (5112) in Morocco

100% Rayon Fabric (5408.22.90) woven in Morocco of filament yarn produced in Taiwan

All fabric cut and sewn in Morocco, made into a Men’s Cashmere Overcoat with Rayon Lining ( 6201.11 ) and exported to the U.S.

Example 4 - Visible Lining

? U.S. Morocco Morocco

Taiwan Morocco Morocco

Example 4 - Visible Lining Fabric Forward Rule Yarn Forward Rule Visible Lining Fabric

6201.11: This is the same “yarn forward” rule as used in example 3, but it also states….

… . Provided that any visible lining material contained in the apparel article satisfies the requirements of Chapter Rule 1 for Chapter 62.

… visible lining material in certain men’s and women’s garments must be formed from yarn and finished in the territory of a Party.

Example 4 - Visible Lining

Article 4.3.7 of the Agreement

Rule allows for the use of non-originating Fibers and Yarns in the component that determines the tariff classification, up to 7% by weight of the total weight of the component.

Exception for Elastomeric Yarns

Special Rules: De Minimis Fiber Yarn

If the stripes on this shirt are composed of foreign yarns, the shirt would still qualify as an originating good, as long as the yarns weigh not more than 7%.

De Minimis

Raw Canadian Wool (5101) formed into Wool Yarn (5107) in the U.S. and exported to Morocco

U.S. Wool Yarn woven into Fabric (5112) in Morocco

Fabric incorporates as a Pin-Stripe a Rayon Filament Yarn formed in Malaysia (Comprises 5% of the fabric by weight)

Fabric cut and sewn in Morocco into Men’s Suit Coats ( 6203.31 )

Suit Coats exported to the U.S.

What if Jacket had a Visible Lining?

Example 5 - De Minimis

Canada U.S. Morocco Morocco

Malaysia Morocco Morocco

Example 5 - De Minimis Yarn Not More than 7% Yarn Forward Rule

Article 4.3.8 : Textile or Apparel goods cannot be an originating set * unless:

each good in the set is originating, or

the non-originating goods in the set do not exceed 10% of the value of the set.

There are not many textile or apparel sets.

* “Set”is defined in General Rule of Interpretation (GRI) 3 of the Harmonized System

Treatment of Sets

Tariff Preference Levels (TPL) are a major exception to the Tariff Shift Rules.

TPLs allow for the use of non-originating materials, and although the finished product is not an “originating” product under the FTA, it is eligible for preferential treatment as if it were an originating product!

This provision is limited.

Tariff Preference Levels

Article 4.3.9-14 : TPLs for Non-Originating:

Fabric of Chapters 51, 52, 54, 55, 58 and 60.

Apparel of Chapters 61 and 62.

Tariff Preference Levels (TPL)

Non-originating Fabric and Apparel goods entered under the TPL are eligible for duty-free access up to a limited amount.

The TPL is only applicable for the first 10 years of the free trade agreement.

In year 11 of the agreement, the TPL is eliminated, and non-originating goods are subject to duty. (Exception is eliminated.)

Quantity in Square Meter Equivalents

Years 1-4: 30,000,000

Year 5: 25,714,000

Year 6: 21,428,000

Year 7: 17,142,000

Year 8: 12,856,000

Year 9: 8,571,000

Year 10: 4,285,000

Year 11: -0-

The fabric and apparel goods shall receive preferential tariff treatment, regardless of the origin of the fiber, yarn or fabric used to produce the goods.

Must meet other FTA rules such as, for garments, the fabric must be cut and sewn in an FTA party.

Knit Cotton Fabric (6005) is produced in Sri Lanka and exported to Morocco

Fabric cut and sewn into Women’s knit tops ( 6110.20 ) in Morocco

Exported to the U.S.

Example 6 - Tariff Preference Levels

? ? Sri Lanka Morocco

Example 6 - TPL for Apparel TPL Rule Yarn Forward Rule But...

“… from fabric or yarn produced or obtained from outside the territory of a Party, regardless of the origin…”

Knit-to-Shape components are not considered “fabric” and therefore garments containing them do NOT qualify for the TPL!

TPL - WARNING !

Article 4.3.15 :

TPL for Yarn and Knit Fabric containing Cotton Fibers from designated least-developed sub-Saharan African countries.

Only Yarn and Knit Fabric have a “fiber forward” preference rule of origin.

Non-Originating Yarn and Knit Fabric containing Cotton Fibers from certain sub-Saharan African countries, are eligible for duty free treatment.

Sub-Saharan African Cotton

Bulletin Officiel, No. 4861 – 6 chaoual 1421 (1.1.2001), Exoneration du droit d’importation en faveur des produits originaires et en provenance de certains pays d’Afrique .

Limited to 1,067,257 kilograms annually.

This provision does not expire.

Sub-Saharan African Cotton

Example 1 : Origin is Morocco; Not eligible for preference because the Egyptian cotton does not satisfy tariff shift rule for 5205.

Example 2 : Origin is Morocco; Eligible for preference. It meets the tariff shift rule for 5512.

Example 3 : Origin is Morocco; Eligible for preference. Only has to meet the yarn forward rule to satisfy tariff shift rule for 6204.62. (fibers could be foreign)

Example 4 : Origin is Morocco; Eligible for preference. Both the tariff shift rule and the visible lining rule for 6201.11 is satisfied.

Keys to Exercises

Example 5 : Origin is Morocco; Eligible for preference as the tariff shift rule for 6203.31 is satisfied. Rayon yarn meets de minimis levels. If it had a lining, it would have to meet the visible lining rule.

Example 6 : Origin is Morocco; Eligible for preference under TPL.

Keys to Exercises A+

A Future Customs Official?

Under the U.S.-Morocco FTA, certain textiles and apparel qualify for duty-free entry.

Both Governments want this agreement to benefit those that comply with terms of the agreement.

Compliance and Enforcement

Article 4.4 of the U.S.-Morocco FTA has strong Customs Cooperation provisions.

Allows for the joint (Morocco/U.S.) verification of FTA preference claims.

Customs Cooperation

Article 4.4.2 : If requested by the United States, Morocco shall verify a claim of origin. If requested by Morocco, the United States shall verify a claim of origin.

Customs Cooperation

Article 4.4.4 : Each party shall permit the other to assist in a verification, after notifying the other party.

Article 4.4.5 : Each party shall provide the other information or documents.

Customs Cooperation

Article 4.4.6 : Each party may take appropriate action, including suspending preferential tariff treatment to ANY textile or apparel good exported or produced by a company if there is reasonable suspicion.

Customs Cooperation

Article 4.4.7 : The party conducting the verification shall provide a written report.

Article 4.4.10 : The parties shall consult to resolve any technical or interpretive difficulties or to discuss ways to improve cooperation.

Customs Cooperation

In order for the U.S. importer to receive preferential duty, they must make a declaration to U.S. Customs and Border Protection (CBP).

CBP uses the principles of “ Informed Compliance .”

Compliance

CBP publishes on the Internet, guidance to the importing community, including implementation information on Free Trade Agreements.

Notices to the Public www.cbp.gov

Interested Parties may request a ( FREE ) Binding Ruling from CBP!

Classification under the HTS

FTA Eligibility

Binding Rulings from CBP

Please send letter, sample and/or detailed description to:

Office of International Trade

Regulations and Rulings

U.S. Customs and Border Protection

1300 Pennsylvania Ave, NW

Washington, DC 20229 USA

Binding Rulings from CBP

Ruling requests may now be submitted over the Internet via “ eRuling ”.

Details on www.cbp.gov

Then link to:

import

rulings

Introducing “eRulings”

Rulings issued to all parties are located on the C ustoms R uling O nline S earch S ystem, or “ CROSS ”.

www.cbp.gov

Then link to:

import

rulings

CROSS

Binding Rulings - CROSS

Customs & Border Protection publication:

Importing into the United States

Designed for the Novice Importer

Classification and Valuation

Invoice Requirements

Marking Requirements

Customs Brokers

CBP Publication

www.cbp.gov/xp/cgov/toolbox/publications

What Every Member of the Trade Community Should Know About:

Apparel Terminology

Fiber Trade Names & Generic Terms

Fibers & Yarns: Construction & Class.

NAFTA for Textile Articles

Ribbons & Trimmings

Textile & Apparel Rules of Origin

CBP Publications

www.cbp.gov/xp/cgov/toolbox/publications

U.S. Government Internet Resources :

Rules of Origin & Rulings www.cbp.gov

Textile Trade Data otexa.ita.doc.gov

Trade Agreements www.ustr.gov

Duty Rates www.usitc.gov

Labeling www.ftc.gov

Internet Resources

This presentation is simply a brief overview of the preference rules for textiles and apparel. The presentation attempts to show the “general rule” for major products, but it does not include most exceptions to the rule. Interested parties may consider requesting a binding ruling from U.S. Customs & Border Protection prior to exporting to the United States.

Disclaimer